Investing.com -- Goldman Sachs has warned that a re-escalation of hostilities in the Middle East or a prolonged closure of the Strait of Hormuz remains "the most obvious downside threat" for financial markets, even as a broad rally in equities, emerging market assets and artificial intelligence-related stocks pushes valuations to new cycle highs.

In a note to clients, analyst Dominic Wilson said the Iran ceasefire has allowed markets to compress risk premia sharply across asset classes, with physical shortages in commodities and the AI supply chain driving capital flows and renewed optimism lifting AI-heavy indices, including Korea, Taiwan, and the Nasdaq, to pre-war highs.

“After a sharp recovery, the distribution of risks is more balanced,” Wilson stated. However, he argued that the deeper downside tail, centered on an Iran re-escalation, remains underpriced.

The bank believes a gradual restart of energy flows would provide meaningful relief across oil prices and rates markets that are currently priced quite hawkishly, and could broaden positive price action geographically and across sectors.

Goldman Sachs also pushed back the timing of rate cuts, expecting fewer or no reductions across developed and emerging market central banks through 2026.

On the AI theme, Goldman Sachs said technology investment spending has now exceeded late-1990s peaks as a share of gross domestic product, and warned of growing valuation risk.

The firm flagged what it called "distributional" volatility within the AI theme (winners versus losers) as a key dynamic keeping single-stock volatility elevated while pushing correlations to record lows, limiting broader index volatility.